China Tech Start-Ups: Coming Home? 中国科技企业扎堆国内上市?

There’s an interesting report out this morning noting that a growing number of Chinese tech start-ups that once looked like strong candidates for New York IPOs are opting for home listings instead, deterred by higher scrutiny and weak sentiment overseas and a much friendlier — if not volatile — environment on ChiNext, China’s 2-year-old Nasdaq-style enterprise board. In the latest move on that front, Chinese media are reporting a company called Baofeng, maker of a popular online and cellphone video player, has filed to make a public listing on the ChiNext, reversing its plans last year when it said it would make a 2012 listing overseas. (Chinese article) Frankly speaking, Baofeng does have the exact profile of a company that would have traditionally gone to either the Nasdaq or New York Stock Exchange to raise funds as its first choice a year ago, followed by Hong Kong as a second choice and the ChiNext as a distant third. But much has changed from a year ago, when foreign investors were still quite bullish on Chinese Internet stocks, giving them relatively rich valuations compared with peers based in more developed western markets. Such stocks have suffered a major reversal of fortune over the last year, with investors dumping their shares following a series of accounting scandals that also led to higher regulatory scrutiny and the delisting of a number of smaller players. Amid all the scandals last year, China’s securities regulator also got involved, trying to insert itself into the overseas listing process as the central government also reportedly discussed either limiting or shutting down that process completely. As far as I know, nothing specific has happened yet in terms of new Chinese government oversight, though a number of big-name western investment banks have refused to underwrite New York IPOs for some China firms over concerns about their accounting. In one of the highest profile cases, Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) both reportedly resigned from an IPO last summer for leading group buying site LaShou, which went on to hire some smaller banks but has yet to make an offering. (previous post) The lone Chinese company that did make a New York IPO this year, discount retailer Vipshop (NYSE: VIPS) was an unqualified disaster, pricing well below its indicated range and falling 30 percent since its trading debut. This new report notes that Baofeng is just the latest example of a Chinese tech start-up going to ChiNext rather than overseas, following similar moves by firms like online game developers Wushen Century Network Technology and Suzhou Snail Game. It’s probably too early to say if this move to the ChiNext will be a long-term phenomenon, and I suspect these start-ups that list there will quickly discover the market’s high volatility is far less desirable than the more stable environments in New York and Hong Kong. But if the ChiNext can implement reforms to lower volatility in the market, perhaps by opening up to more foreign investors, it could seize this opportunity to quickly position itself as a strong alternative to New York and Hong Kong for China’s vibrant field of tech start-ups.

Bottom line: A recent move by tech start-ups to China’s Nasdaq-style enterprise board could become a viable IPO alternative if the board can create a more stable listing environment.

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